Prohibition

Episode Summary

The podcast discusses prohibition in America and the role of economists in supporting it. Irving Fisher, a famous economist in the early 1900s, was a major proponent of prohibition. He claimed prohibition would boost America's economy by $6 billion, though his math was dubious. Fisher also wrongly predicted prohibition would usher in a new prosperous era for America. In reality, prohibition failed and became infamous as a farce. Historians trace the roots of prohibition to religion and class-based snobbery, not productivity concerns. Gary Becker later showed that making something illegal adds a cost that rational people weigh against benefits. So prohibition simply led to black markets and bootlegging by criminals like Al Capone, who could profit from the inflated prices. The demand for alcohol proved to be inelastic - people still paid higher black market prices. And the lack of regulations encouraged sellers to make their product more potent while cutting costs and quality. Other countries also tried bans on alcohol, with similar poor results. Public choice theory explains such failures through "bootleggers and Baptists" - moralists favoring bans align with profiteering cynics. In recent years, views on banning substances like cannabis have shifted. Nations are legalizing and taxing it, recognizing that costs can be imposed through legal channels too. Free market advocates argue taxation could eliminate the black market. Today, economists overwhelmingly oppose blanket prohibition, favoring evidence-based policies instead. The failures of alcohol prohibition provided an important economic lesson.

Episode Show Notes

When the US outlawed the manufacture and sale of alcoholic beverages, it inadvertently created one of the most successful black markets in the world. Tim Harford considers how much it costs to make something illegal, and what a failed law reveals about the way criminals make their money.

Episode Transcript

SPEAKER_06: Amazing, fascinating stories of inventions, ideas and innovations. Yes, this is the podcast about the things that have helped to shape our lives. Podcasts from the BBC World Service are supported by advertising. SPEAKER_04: 50 Things That Made the Modern Economy with Tim Harford SPEAKER_01: We economists have an image problem. People think we shamelessly massage statistics. We overconfidently make terrible predictions. We're no fun at drinks parties, that kind of thing. Perhaps some of the blame lies with the man who, a century ago, was probably the most famous economist in the world. His name? Irving Fisher. It was Fisher who notoriously claimed in October 1929 that the stock market had reached a permanently high plateau. Nine SPEAKER_01: days later came the crash that led to the Great Depression. As for parties, the best that can be said for Fisher was that he was a generous host. One dinner guest wrote, while SPEAKER_00: I ate right through my succession of delicious courses, he dined on a vegetable and a raw egg. Fisher was a fitness fanatic who avoided meat, tea, coffee and chocolate. Fisher, of SPEAKER_01: course, didn't drink alcohol. But he also thought nobody else should drink alcohol either. So it seems to the entire economics profession, Fisher claimed to have been unable to find a single economist willing to oppose prohibition in a debate. Prohibition was America's ill-fated attempt to outlaw the manufacture and sale of alcohol. It began in 1920. Fisher predicted SPEAKER_02: it would go down in history as ushering in a new era in the world in which accomplishment of this nation will take pride forever. That worked out about as well as the permanently SPEAKER_01: high plateau. Historians have typically seen prohibition as a farce. The roots of prohibition are generally traced to religion, perhaps laced with class-based snobbery. But economists had another concern. Productivity. Wouldn't sober nations out-compete those with a workforce of drunks? Fisher seems to have happily taken some liberties with figures. He claimed, for example, that prohibition was worth $6 billion to America's economy. Was this the result of careful study? No, said one bemused critic. Fisher evidently started with reports from a few individuals that a stiff drink on an empty stomach made them 2% less efficient. Then he assumed that workers habitually downed five stiff drinks just before work. Then he multiplied the two by five and concluded that alcohol lopped 10% off production. Dubious, to say the least. Economists might have been less surprised by the failure of prohibition if they'd been able to fast-forward half a century to Gary Becker's Nobel Prize-winning insights on rational crime. Becker explained that making something illegal simply adds a cost that rational people will weigh up alongside other costs and benefits. That cost is the penalty if you're caught, modulated by the probability of being caught. Becker meant it, too. The first time I met him, he parked his car in such a way as to risk getting a ticket. I don't think they'd checked that carefully, he told me, cheerfully admitting that he had committed a rational crime. Rational criminals, said Becker, will supply prohibited goods at the right price. Whether consumers will pay that price depends on what economists call elasticity of demand. Imagine, for example, that the government bans broccoli. Would black marketeers grow broccoli in secluded back gardens and sell it down dark alleys for an inflated price? With alcohol, it turns out, demand is inelastic. Hike the price and many will still pay. Prohibition was a boon for rational criminals such as Al Capone, who defended his bootlegging in entrepreneurial terms. I give the public SPEAKER_03: what the public wants. I never had to send out high-pressure salesmen. Why, I could never meet the demand. Black markets change incentives in other ways. Your competitors can't take SPEAKER_01: you to court. So why not use whatever means necessary to establish a local monopoly? A Every shipment of illegal goods carries some risk, so why not save space by making your product more potent? And why not cut costs by lowering quality? If you're making moonshine, strong illegal drink, you don't have to list your ingredients on the label. America wasn't the only country to try prohibition. Others included Iceland, Finland and the Faro Isles. But nowadays nations which strictly ban booze tend to be Islamic. Others have partial restrictions. In the Philippines, for instance, you can't buy alcohol on election day. Or in Thailand on Buddhist holidays, except at the airport duty-free. America still has dry counties and local blue laws which ban sales on Sundays. Those laws inspired the economist Bruce Yandle to coin a term that's become common in the branch of economics called public choice theory. Bootleggers and Baptists. The idea is that regulations are often supported by a surprising alliance of noble-minded moralists and profit-driven cynics. Think about bans on cannabis. Who supports them? The Baptists are anyone who thinks cannabis is wrong. The bootleggers are the rational criminals who profit from illicit dope, along with anyone else with an economic interest in anti-drugs laws, such as the bureaucrats paid to enforce them. In recent years that alliance has weakened. Cannabis has been legalised or decriminalised from California to Canada, from Austria to Uruguay. Debates in other countries are raging. If you're going to impose costs on cannabis producers, should you do that by trying to enforce laws against selling cannabis, or by making it legal and imposing a tax? In the UK, the free market think tank, the Institute for Economic Affairs, crunched the numbers on elasticity of demand. They reckon a 30% tax would almost eradicate the black market, raise about £700 million, almost a billion dollars, for the government, and lead to safer drugs too, just as the end of prohibition led to safer drinks. Today you'd have no trouble finding economists to oppose prohibition of cannabis. Five Nobel Prize winners have called for an end to the war on drugs, and instead for evidence-based policies underpinned by rigorous economic analysis. Naturally, that evidence covers productivity. Some studies find that cannabis impairs functioning. Others find no effect. One slightly implausible outlier even found that toking a spliff gave a short-term boost to workers' hourly output. One wonders what Irving Fisher would have made of that. SPEAKER_04: Mark Thornton's book, The Economics of Prohibition, helped us write this episode. For a full list of our sources, please see bbcworldservice.com slash 50things. SPEAKER_07: I'm Kim Chaganeta, and I'm the host of the Conversation Podcast from the BBC World Service. Oh boy, I'm overwhelmed with so much to say in such a short time. SPEAKER_07: Some recent favorites include an episode on female roadies. These two incredible women who've just been touring the world with musicians and had some incredible stories to tell. This is a live show and sometimes things go wrong and tonight something's gone wrong. I also found the episode on women living with schizophrenia incredibly powerful. She does not believe that there's such a thing as a mental illness. She still thinks that perhaps it was her demonic possession that happened to me. Another episode was about women who were standing up to street harassment. I'm sick of it. It's in front of my house, it's in my street, it's near my train station, SPEAKER_05: it's all the time. And I've always had female flight attendants on my wish list and we finally got to speak SPEAKER_07: to two women who had spent a lot of time up in the air. SPEAKER_04: People just stormed the door because they had to get off the plane, they were so scared. SPEAKER_07: That's the Conversation from the BBC World Service. You can't put price tag on these emotions. Search for The Conversation wherever you found this podcast.